Economic downturn leads to near record apartment vacancies

The vacancy rate for U.S. apartments in the second quarter has reached 7.5 percent -- the highest level since 1987, increasing 1.4 percentage points from a year ago, according to real estate research firm Reis Inc. The all-time record for vacancies was 7.8 percent in 1986. Victor Calanog, Reis's director of research told Reuters, "We are reaching that historic high very quickly." Moreover, Reuters writes that "the apartment buildings sector has led all commercial real estate categories on loan defaults."

Is this good news or bad news? Let's take a look at both sides of the coin here, starting with the good news. Bear with me here, but maybe -- just maybe -- the number of vacancies has increased because of the housing situation. What if apartment tenants are realizing that home prices are at record lows, creating an excellent opportunity for people looking to snap up a home at a low price? It is entirely possible that savvy renters are looking to get out from their apartment agreements and are looking to strike out on their own.

But hard as I try to be optimistic here, it is far more believable that this is bad news caused by the rising unemployment. The article notes that the U.S. apartment market relies on 18- to 24-year olds as its largest tenant group. This group is also the hardest hit by rising unemployment, and couldn't even take advantage of the declines in rent, which during the second quarter dropped to $1,040 a month, or 0.7 percent lower than a year ago and 0.6 percent lower than the previous quarter. This drop is the largest quarterly fall since Reis started tracking this data in 1999.

Landlords are trying to use incentives to attract new renters, resulting in the effective rent dropping to $975 -- 1.9 percent lower than a year ago and 0.9 percent lower than the first quarter. Concessions have been increased across the country, with areas such as Las Vegas, San Francisco and San Jose (California) logging a 2 percent fall in effective rents. Reis expects this trend to continue for a few more quarters, as it expects more than 100,000 units from new construction to flood the market by the end of the year, keeping rents low and vacancies high.

I am not naive (although some have suggested otherwise in the past). This news is far more negative than it is positive as it shows that more people are out of an apartment. Perhaps they are staying with family members, perhaps they are finding roommates in order to defer costs and some may simply have moved. There can be several reasons that the number of renters may have dropped. Unfortunately, with some rents coming in higher than my mortgage payment, it is far more likely that we will see continued economic struggles leading to a further downturn in the number of renters.